Technical Due Diligence: Trust is good but control is better

RICS Europe establishes guidelines for the execution of technical due diligence

Frankfurt, March 2nd, 2011 - The risks associated with finalizing real estate sales or leases without appropriate technical due diligence are well-known. Proper technical due diligence reveals the details that determine whether or not a building is sound enough to be listed for sale. Considering the importance of such details, you would therefore assume that risk assessments based on technical due diligence are a standard component of real estate transactions.

Incredibly, in-depth due diligence is not in fact a standard component of real estate transactions. In many cases, buyers simply throw caution to the wind because they are afraid to miss out on a good deal. When buyers feel pressed for time, long-term lease contracts are signed after only cursory inspections and purchase decisions are made that end up being nothing more than expensive long-term obligations for the buyer. Soon enough after concluding the deal, missing maintenance records and deviation reports end up costing time and resources that negate the originally perceived value of the purchase or lease.

During the years leading up to the recent global financial crisis, prices for commercial real estate increased continuously and investors found themselves in bidding wars. In those situations, proper due diligence was often waived for the sake of timing. Today, many assets that were not properly vetted when they should have been are sitting on the books of many institutions through either full ownership or participations.

It is crucial to make the market aware of the importance of proper technical due diligence. To that end, RICS has now set forth guidelines for the execution of technical due diligence for real estate transactions in Europe. The purpose of these guidelines is to apply a systematic approach to determining the true condition of a given real estate asset. The guidelines also illustrate that there are tools in the market that are built to improve conducting due diligence. One such tool is the virtual data room.

Holger Weber, chairman of x project AG and specialist for real estate documentation and area analysis states "The thorough inspection of often poor quality plans and document files can only be carried out with a high-performance data room. Determining the existing financial risk is just as important as to verifying the true rentable area. Nobody wants to risk a devaluation of the asset which could end up being significant over time."

Guidelines for the execution of the technical diligence will benefit all parties involved in real estate transactions because Objectives and tasks are clearly defined.

Please see the complete guidelines established by RICS here.